Value of information in a two-stage supply chain with non-stationary demand

We consider the two level supply chain of Lee et al. (2000) with a single manufacturer supplying a single retailer. The retailer faces non‐stationary demand that follows an ARIMA(0, 1, 1) process, as opposed to an AR(1) process in Lee et al. (2000). Without information sharing in the supply chain, the retailer only conveys his order to the manufacturer. With information sharing, the retailer at the end of the period, in addition to conveying his order, also conveys his demand level for the period. We consider a periodic review system for both the retailer and the manufacturer and derive expressions for the manufacturer's optimal order‐up‐to level with and without information sharing. We also calculate manufacturer costs with and without information sharing. We next do numerical work to determine the value of information sharing. We find that the reduction in manufacturer costs with information sharing increases as the uncertainty of demand increases. Our numerical results indicate that there can be significant benefits to the manufacturer, when information on demand is shared by the retailer. In particular, the average percentage reduction in manufacturer costs with information sharing could be in the range of 62%‐68%. Thus, information sharing results in significant benefits to the manufacturer.